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Gift Tax and Federal Law

November 21, 2018

How did it feel falling off the “Fiscal Cliff”? Most people didn’t notice. On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012.

ESTATE TAX: The estate tax and gift tax exemptions are the same as 2012 at $5.12 million per person but anticipated to be increased to $5.25 million for 2013 (pending official confirmation from the IRS). It will continue to increase annually. The only thing the lawmakers actually changed was the gift and estate tax rate for non-exempt transfers which have gone up from 35% to a top rate of 40% effective January 2013. This is great news for the vast majority of our clients who will be unaffected by the increase in the tax rate.

GIFT TAX: The “lifetime gift tax exclusion” and the “estate tax exclusion” are expressed as a total amount known as the “unified credit” whether you transfer assets before or after death. If you exceed the limit, you (or your estate) will owe tax up to 40% on the excess amount. The IRS expects you to keep a running tab by filing gift tax returns so they know how much has been used up when you die. There are lifetime gifts that you do not have to report. We can each gift $14,000 per person per year without it counting against the lifetime exemption.

PERMANENT: What Congress did was to make “permanent” the system that has been in effect for the last two years. The only way the law will change is through another act of Congress, which given the current environment is unlikely…

PORTABILITY: Also permanent is the “portability” rule. It permits the surviving spouse the option to inherit a deceased spouse’s unused estate tax exemption. Under prior law, a spouse’s federal estate tax exemption could have died with them, but thanks to the portability rule, the surviving spouse generally may use both exemptions to shelter lifetime gifts or bequests at death from federal gift or estate taxes.
Portability is not automatic. A timely estate tax return must be filed when the first spouse dies, even if no tax is owed. Hopefully, the IRS develops a short form for this purpose. Surviving spouses have declined to file estate tax returns because they thought it was a hassle. Spouses should file it even if they’re not “wealthy” today because they do not know what the future holds.